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Stock Market News for June 12, 2014

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Benchmarks dropped the most in three weeks on Wednesday after World Bank lowered projections for global economic growth. The Dow snapped a four-day rally of record high closes. The blue-chip index also closed 157 points away from its key technical level of 17,000. The Nasdaq also ended a five-session winning streak. The S&P 500 recorded its biggest one day percentage decline since May 20. Separately, the U.S. airlines industry was hit hard after Deutsche Lufthansa AG lowered its earnings forecast for 2015 and 2016. Investors were also concerned over U.S. House Majority Leader Eric Canton’s defeat in the primary election.

For a look at the issues currently facing the markets, make sure to read today’s Ahead of Wall Street article

The Dow Jones Industrial Average (DJI) declined 0.6% to close Wednesday’s trading session at 16,843.88. The Standard & Poor 500 (S&P 500) dropped almost 0.4% to finish at 1,924.24. The tech-laden Nasdaq Composite Index dropped 0.1% to 4,331.93. The fear-gauge CBOE Volatility Index (VIX) went up 5.6% to settle at 11.60. Total volume for the day was roughly 5.20 billion shares, lower than last month’s average of 5.76 billion. Decliners outpaced advancing stocks on the NYSE. For 60% stocks that declined, 37% advanced.

Benchmarks ended in the red on Wednesday after World Bank trimmed its global growth forecast for 2014. The bank reduced its global growth forecast to 2.8% for the year. In January, the bank had projected that the global economy will expand by 3.2% this year. Harsh winter weather in the U.S. and the ongoing crisis in Ukraine were cited to be the primary reasons behind this reduction in the global economic outlook.

The bank assumed that tensions in Ukraine will continue but won’t intensify. However, if the situation worsens then investor sentiment may be dented and subsequently hamper investments. Growth in developing countries might fall 1.4 percentage points if tension between Russia and Ukraine over Crimea further escalates. Meanwhile, Russia and Ukraine are trying to settle a gas price dispute, failing which the peace process may be disrupted.

World Bank also projected that policy paralysis in many countries, slow progress on structural reforms, rise in military conflicts and an anticipation of higher interest rates in future might restrict growth in emerging countries.

World Bank Group President Jim Yong Kim said: “Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40 percent.” He added: “Clearly, countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation”.

However, World Bank also predicted that global economic growth will strengthen to 3.4% and 3.5% in 2015 and 2016, respectively. Further, the bank predicted that highly developed countries will bounce back during the latter part of the year. The bank expects that during this period the effect of government spending cuts will subside, labor market conditions will improve and pent-up demand for consumer durables and investment goods will begin to flow through these economies. Growth in high-income countries is expected to come in at 1.9%, 2.4% and 2.5% in 2014, 2015 and 2016, respectively. High-income economies are expected to contribute about half of global growth in years 2015 and 2016. In 2013, these economies had contributed less than 40% of global growth.

Meanwhile, Bank of America Corporation (NYSE:BAC) was the biggest drag on the S&P 500. Shares of the financial behemoth dropped 2.1% following a deadlock between the company and the U.S. Department of Justice while negotiating a multi-billion dollar settlement. The negotiation related to the bank’s mortgage investments.

Airline stocks were big losers on Wednesday following a profit warning by Deutsche Lufthansa AG. The German airliner reduced its operating profit 2014 forecast to €1 billion due to “weaker-than-expected revenue development” in its passenger and freight business. The company had earlier projected its operating profit to be in the range €1.3 billion to €1.5 billion for 2014. The company further trimmed its 2015 earnings forecast to €2 billion from €2.65 billion.

This announcement affected US airline stocks. Shares of U.S. airline companies such as Delta Air Lines Inc. (NYSE:DAL), United Continental Holdings, Inc. (NYSE:UAL), American Airlines Group Inc. (NASDAQ:AAL) and The Boeing Company (NYSE:BA) declined 2.0%, 5.2%, 3.1% and 2.3%, respectively.

Meanwhile, investors assessed the long term market impact of Eric Cantor’s primary election defeat. The U.S. House Majority leader lost to a Tea Party-backed candidate. Cantor played major roles on issues ranging from Troubled Asset Relief Program to defending the Export-Import Bank.

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